Low oil prices and demand for cars to drive palladium prices north
2015 should be an exciting year for palladium prices, which could hit record highs, driven by strong car sales worldwide. Scotiabank, which recently published its analysis of the global automotive market, predicts that car sales will increase by 4% and hit a new record during 2015. This means that palladium demand will also increase because it is a key material for the production of automotive catalysts.
Global car sales will be pulled by Asia and North America, thanks to a series of favorable factors including higher employment, low interest rates and higher household purchasing power thanks to much lower oil prices. These factors will be have an especially strong effect in China, where car sales may increase by 17% compared to 2014, and reaching almost 19.5 million units. Sales of Chinese cars will be affected by the strong demand for luxury models and monetary easing policies applied the country’s central bank. In North America, car sales in Canada, Mexico and the United States could set new records compared to 2000. Canada’s Central Bank has lowered interest rates yesterday, generating even greater purchasing impulse. In the USA, car ‘seniority’ will be one of the main reasons prompting Americans to buy a new car; in fact, some 40% of vehicles in the country is 12 years old, which means many cars will have to be replaced. In Western Europe, the car market is still reeling from the weak economic recovery, but slightly better growth projections should translate to higher than average sales auto sales are expected to increase slightly during 2015.
Palladium demand and prices could have an immediate benefit. The only concern is that palladium, as a precious metal and not unlike platinum, is often correlated to gold and silver, which suffered in 2014. However, gold has been performing well, resuming its traditional safe haven role, over the past few weeks in response to geopolitical risk. Scotiabank’s study is optimistic and describes palladium’s long-term fundamentals as very strong. One such fundamental that will have tremendous impact is the low price of gasoline, which stimulates the car market. Palladium is rarer than gold and each car requires a few grams of palladium for its catalytic converter; the British firm Johnson Matthey, a refiner of precious metals and a leading manufacturer of anti-emission converters, sets its targets based on worldwide car sales estimates prepared by the Macquarie Group, which in 2015 point to a 3.4% increase.
In September, palladium hit the highest price of the past 13 years at USD$ 900/oz. approximately; nevertheless, none of these bullish considerations have boosted prices yet. The price of palladium is now fluctuating between USD$ 750-770/oz. An ounce of palladium is sufficient to meet the needs of 10 vehicles, according to Stillwater Mining, a number of US producers of palladium. Paradoxically, if palladium prices should rise too high, it would drive end users to switch to platinum, which, for now, is much more expensive. For 2015, Morgan Stanley has predicted an average of USD$ 881 per ounce, or 10% higher than 2014. Supply is lower, suffering from a lower production in South Africa and the sanctions imposed by the West against Russia.
A car’s catalytic converter, meanwhile, also contains cerium and lanthanum and if demand for palladium will increase because of the growth of the car market, so will the demand for rare earths, which are used in various components. Thanks to the optical properties, rare earths are used in new-generation lamps and fluorescent lamps. These technologies alone absorb several hundred kilograms of rare earth, but they are found small amounts in many other applications, mostly of electrical and consumer electronics such as audio systems, sensors, and hard drives. But the increased use of these metals with technology less known, the center of large industrial processes such as petroleum refining (in the process of fluid catalytic cracking), the glass industry or the production of buffing dust. These processes cover 62% of its current rare earth. Other technologies that use a lesser amount rare earths are catalytic converters, fuel cells, the high-temperature superconductors and nanotechnology.
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